Meta

Blockheads

In that post I said that the most obtuse people of all are not deficit hawks, nor people who invoke the bogeyman of Zimbabwe hyperinflation, nor the liars or cynics, or the mean spirited, or idiots in general.

No, the most block-headed people of all are those who insist that all money is created by banks as loans.

I’ve discussed this many times, for two reasons. First, these people’s delusions are reprinted in numerous “progressive” blogs like Counterpunch. Second (and more importantly) their foolishness strengthens the lie that the U.S. government is “bankrupt,” and has a “debt crisis.” This lie lets politicians impose more austerity and neo-liberalism on the masses, in order to widen the gap between the rich and the rest.

You cannot set the blockheads straight. They reject the facts no matter how tightly reasoned are your comments. Being “geniuses,” they are not teachable.

Donald Trump “gets it.” On 9 May 2016 Trump correctly said the U.S. government will never default, since it can “print more money.” For the blockheads, the U.S. government cannot create money. Only the banks can.

Here’s Ellen Brown, as reprinted in Counterpunch. This is all one paragraph, but I will break it down. My comments are in blue.

As the Bank of England recently acknowledged, the vast majority of the money supply is now created by banks when they make loans. Yes, because the U.S. government creates money out of thin air, but deliberately creates too little of it, in order to force us to take out loans, and become debt slaves. It’s called gratuitous austerity. Ellen believes the lie told by the Bank of England that all money is created by banks as loans.

Money is created when loans are made, and it is extinguished when loans are paid off. True. Money is also created by government spending, and it is extinguished via federal government taxation.

When loan repayment exceeds borrowing, the money supply “deflates” or shrinks. New money then needs to be injected to fill the breach. The U.S. government can do that, but if politicians refuse to do so (refuse to create enough money) they cause the real economy to remain in a permanent recession. Politicians do this intentionally, in order to widen the gap between the rich and the rest, and to force us to take out loans. They reduce us to a world of “payday loan” scammers, in which all money in the economy flows upward to the criminal bankers at the top.

Currently, the only way to get new money into the economy is for someone to borrow it into existence. WRONG!And since the private sector is not borrowing, the public sector must borrow, just to replace what has been lost in debt repayment. The “public sector” (i.e. federal government) does not borrow a single penny of its spending money from anyone. But government borrowing from the private sector means running up interest charges and hitting deficit limits. WRONG! And by the way, Republicans in the U.S. Congress use their “debt limit” charade when they want to slash social programs, but there is no such thing as a “deficit limit.”

The alternative is to do what governments arguably should have been doing all along (and which they have been doing all along), which is to issue the money directly to fund their budgets. Having exhausted other options, some central bankers are now calling for this form of “helicopter money,” which may finally be raining on Japan if not the US.

Following a sweeping election win announced on July 10th, Prime Minister Shinzo Abe said he may proceed with a JPY10 trillion ($100 billion) stimulus funded by Japan’s first new major debt issuance in four years. The stimulus would include establishing 21st century infrastructure, faster construction of high-speed rail lines, and measures to support domestic demand.

No, Ellen. The Bank of Japan may “issue debt” (i.e. sell treasury securities) but this “debt” does not fund the Japanese government. Instead, the Japanese government funds itself. The government creates money out of thin air by crediting bank accounts. It’s as easy as changing numbers on an electronic scoreboard. Meanwhile banks create loan money in exactly the same way.

Incidentally I have always disparaged the phrase “issuing debt.” Technically it is correct, but practically it is clumsy. When you yourself give someone a loan, do you “issue debt”?

Let’s get our terminology straight…

[1] Debt and credit are one and the same thing. They are two sides of the same coin. Yin and yang. What matters is which side of the balance sheet you are on. If you issue a loan, then you issue credit. If you accept a loan, then you are in debt. If you lend me a dollar, then you credit me with a dollar. I am in debt to you for a dollar. Simple.

[2] A credit is a claim to ownership. The claim may or may not be monetary. Likewise a debt may or may not be monetary. A debt is an obligation to honor a credit, which can take any form. Suppose you are at a public place, and you give your coat to an attendant in the cloak room in exchange for a token. The attendant is now in debt to you for one coat. Your token is a credit (claim to ownership) for one coat. In this sense the attendant has “issued debt” and also “issued credit.” But why not keep things simple, and just say the attendant gave you a token?

Likewise, why not drop the mumbo jumbo-about “issuing debt”? Why not just say the government sells Treasury securities?

[3] All money is both a credit and a debt. If you have a dollar, then you have a credit (i.e. a claim to ownership) for one dollar’s worth of the “full faith and credit of the United States.” This credit for a dollar is also a debt that is owed to you by everyone who agrees that your dollar is worth a dollar. Everyone owes you an obligation to honor your credit of one dollar, even though they have not lent any money to you. Debts and credits do not necessarily involve monetary loans.

Again, a credit is a claim to ownership. A debt is an obligation to honor a credit.

[4] A monetarily sovereign government may sell treasury securities, but this is not to “fund the government.” The government creates money out of thin air, and therefore does not need to borrow from anyone.

To help control inflation. Every dollar that is used to buy a treasury security is a dollar deposited in a Federal Reserve savings account. That dollar is out of circulation until the treasury security matures on a timeline that can run from anything between a month to thirty years. If inflation becomes a problem, then the Fed can raise the interest rate it pays on treasury securities, so that more people buy securities, and thereby remove more money from circulation, thereby reducing inflation.

To steady the financial markets. Suppose you want to make a bet in the markets, and you need collateral to back you up. If a nation’s government has monetary sovereignty, then the best collateral of all is a government-issued treasury security. It’s as good as liquid cash, amd the security is worth more than its face value. Moreover the government and central bank will never default on the security. This is one reason why there are twenty trillion dollars on deposit at the Fed (the so-called “national debt”). Twenty trillion dollars as a back-up creates a lot of stability in the speculative markets.

To steady the banking system. Banks are required by law to have reserves. Reserves are money, but they cannot be spent like money. Reserves are secondary money. Quasi-money. Reserves back-up the regular banking and monetary systems by sustaining public trust in the systems. The ultimate in reserves is twenty trillion dollars that people have deposited at the Fed by purchasing treasury securities. That twenty trillion dollars is money, but it cannot be spent. Hence it is called “reserves.” If you purchase a security for a dollar, then your dollar becomes part of the USA’s central reserve (i.e. the Federal Reserve). To convert your reserve dollar into a regular dollar, you must sell your security to someone, or else wait until your security matures, at which point the Fed will automatically convert it for you.

To maintain global trust in the dollar. Suppose your company is Chinese, and you sell ten billion dollars’ worth of goods to U.S. consumers. What will you do with your ten billion dollars? You can’t spend it in China (although you have a bank convert it into renminbi, so you can spend the renminbi in China). You can use it to buy things in foreign nations, but their governments limit what you can by. (For example, they don’t want you to buy their military forces.) Also, your foreign investment may turn sour. You can deposit it in a bank, where your ten billion dollars will earn interest, but banks can fail, and are subject to corruption. What to do? You can deposit your ten billion at the U.S. Federal Reserve by purchasing treasury securities. Not only will your money earn interest; it will back up whatever gambles or investments you choose to make in your life. This is one reason why the U.S. dollar is so popular worldwide. This popularity is the core of U.S. power. Without it, the USA as we know it would cease to exist.

Whether or not they choose to admit it – which they will probably resist very hard – the Abe government is on the verge of becoming the first government of a major developed economy to monetise its government debt on a permanent basis since 1945. The direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act. But it seems that the government may be considering maneuvers to get round these roadblocks.

Nonsense! There is no “financing of a government deficit by the Bank of Japan.” In order to enact a stimulus, the Japanese government simply increases its creation of money out of thin air. Money which the government then spends into the Japanese economy. I scanned that Financial Times article. It is so full of s—t that I will not dignify it with further analysis. I’ll just stamp it…

Then Ellen Brown’s article discusses tangential trivia that is of no concern. Next she asks, “Who should create the money supply, banks or governments?”

Yes, and in addition to that, each fiscal year the U.S. government creates $4 trillion of out thin air, and not as loans. By the end of FY 2016 (which will occur on 30 Sep 2016) the U.S. government will have clawed back $3.525 trillion, leaving a deficit of $474 billion, which is not nearly enough to get the U.S. real economy out of its recession.

Who would we rather have creating the national money supply – a transparent and accountable public entity charged with serving the public interest, or a private corporation solely intent on making profits for its shareholders and executives? We’ve seen the results of the private system: fraud, corruption, speculative bubbles, booms and busts.

Again, Ellen falsely thinks that all money is created by banks as loans. The Fed is indeed privately owned, but it is still subject to federal laws and Congressional oversight (if the U.S. congress ever chose to exercise its oversight). Yes, the Fed is corrupt, since it focuses more on helping Wall Street than helping Main Street. But the U.S. Congress does the same thing. It too is corrupt. It is very rare to find any federal politician or central banker who is not corrupt.

Adair Turner, former chairman of the UK Financial Services Authority, is a cautious advocate of helicopter money. He observes:

“We have been left with so much debt we can’t just grow our way out of it – we should consider a radical option.”

Not that allowing the government to issue money is so radical. It was the innovative system of Benjamin Franklin and the American colonists. Paper scrip represented the government’s IOU for goods and services received. The debt did not have to be repaid in some other currency. The government’s IOU was money. The US dollar is a government IOU backed by the “full faith and credit of the United States.”

Ellen falsely thinks the colonial scrip was issued by colonial government banks (i.e. public banks). In reality, colonial scrip was issued by privately owned colonial banks, or sometimes by privately owned companies such as mines or railroads.

The USA’s first de facto central bank was the Bank of North America. It was privately owned, and it was first chartered on 26 May 1781 by the Confederation Congress. It opened in Philadelphia on 7 Jan 1782. Even then, some states and territories continued to use their own scrip (i.e. their own currency) created by privately owned banks.

(Personally I think that privately owned banks are okay as long as the public has a choice betweenthem and publically owned, non-profit banks.)

The U.S. Treasury was created in 1789, but the U.S. government did not fully become the master of the dollar until the U.S. Civil War. Only by the end of the war (1865) did the entire USA accept federal dollars.

The U.S. Constitution gives Congress the power to “coin money and regulate the value thereof.” Having the power to regulate the value of its coins, Congress could legally issue trillion dollar coins to pay its debts if it chose.

Yes, but what would be the purpose? The U.S. government pays its debts by crediting accounts. It creates money out of thin air, like banks do. The purpose of the “trillion dollar coin” gimmick in 2011 was to offset Republicans and their “debt ceiling” gimmick.

All of Ellen Brown’s articles are based on the false premise that all money is created by banks as loans. She continues…

“The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks. I believe the time will come when people will actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue.”

As you can see, misunderstandings about the “national debt” have been around for many decades.

It is true that the Constitution of the United States does not give the banks the power to create money. However the Constitution does not deny them this power either. Banks create money as loans. Monetarily sovereign governments create money too, and not as loans. Why is this so hard to understand?

As for “selling bonds to commercial banks,” this means the U.S. government sells Treasury securities (for reasons I noted earlier) to investors, which include commercial banks. Proceeds from the sale of T-securities stay in the banking system, and are not used to run the U.S. government. The U.S. government does not borrow money from anyone to fund its operations. The U.S. government creates it spending money out of thin air.

The power to create money has been hijacked from governments by a private banking monopoly engaged in its own sleight of hand, euphemistically called “fractional reserve lending.” The modern banking model is a magician’s trick in which banks lend money only a fraction of which they actually have, effectively counterfeiting the rest as deposits on their books when they make loans.

The U.S. government creates money and spends it. Banks create money and lend it. This is not “counterfeiting.” It is how things are done. The problem is that federal politicians refuse to create enough money to get the U.S. real economy out of its recession. The big banks bribe politicians to impose austerity on you, so that you will have to borrow from the banks. Austerity also leads to mass privatization of public assets. Austerity also creates jobs in law enforcement at all levels, since austerity causes social unrest.

Governments today are blocked (no they aren’t) from exercising their sovereign power to issue the national money supply by misguided legislation designed to avoid hyperinflation. Legislators steeped in flawed monetarist theory are more comfortable borrowing from banks that create the money on their books than creating it themselves. (Wrong. Federal legislators borrow nothing from anyone.) To satisfy these misinformed legislators and the bank lobbyists holding them in thrall, governments must borrow before they spend; but taxpayers balk at the growing debt and interest burden this borrowing entails. By borrowing from its own central bank with “non-marketable perpetual bonds with no maturity date,” the government can satisfy the demands of all parties. Nonsense.

As noted in a July 11th ZeroHedge editorial, Japan “has given the world a glimpse of not only how ‘helicopter money’ will look, but also the market’s enthusiastic response, which needless to say is music to the ears of central bankers everywhere.” If the Japanese trial balloon is successful, many more such experiments can be expected globally.